Business Context and Reporting Period
Jacobs Engineering Group Inc. filed this unaudited Form 10-Q for the quarter and nine months ended June 26, 2020, compared with June 28, 2019. The company operated through two continuing segments: Critical Mission Solutions (CMS) and People & Places Solutions (P&PS). The former Energy, Chemicals and Resources (ECR) business is reported as discontinued operations. Management stated that the company planned to change its name to Jacobs Solutions Inc.
Jacobs provides technical, professional, scientific, consulting, engineering, construction-management, operations and maintenance services to government and commercial customers globally. The company had approximately 55,000 employees and 130.2 million common shares outstanding at July 23, 2020.
Key Financial Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Revenue | $3.260 billion | $3.170 billion | $10.047 billion | $9.345 billion |
| Gross profit | $629.0 million | $626.1 million | $1.922 billion | $1.811 billion |
| Gross margin | 19.3% | 19.8% | 19.1% | 19.4% |
| Operating profit | $194.4 million | $90.0 million | $513.5 million | $305.8 million |
| Operating margin | 6.0% | 2.8% | 5.1% | 3.3% |
| Net earnings attributable to Jacobs | $244.9 million | $524.4 million | $409.9 million | $705.7 million |
| Diluted EPS | $1.87 | $3.80 | $3.08 | $5.02 |
Continuing-operations earnings attributable to Jacobs increased to $226.9 million, or $1.73 diluted EPS, in Q3 from $89.4 million, or $0.65 diluted EPS, in the prior-year quarter. Discontinued operations contributed $18.0 million in Q3 and $125.5 million year to date, versus $435.1 million and $436.6 million, respectively, in the comparable periods, primarily reflecting the prior-year ECR sale gain.
- Segment revenue: CMS revenue increased 4.7% in Q3 and 11.9% year to date; P&PS revenue increased 1.8% in Q3 and 5.2% year to date.
- Segment operating profit: CMS increased to $89.6 million in Q3 and $264.3 million year to date; P&PS increased to $190.5 million and $557.9 million, respectively.
- Cash flow: Operating cash flow was $374.5 million year to date, versus cash used of $220.3 million in the prior-year period. Investing cash flow was negative $392.7 million, while financing cash flow was positive $372.5 million.
- Liquidity: Cash and equivalents were $1.025 billion at June 26, 2020, compared with $631.1 million at September 27, 2019. Available borrowing capacity under the revolving facility was approximately $1.63 billion.
- Debt: Long-term debt was $2.155 billion, up from $1.201 billion at fiscal year-end; short-term debt was eliminated. The company reported compliance with its debt covenants.
- Backlog and performance obligations: Backlog was $23.674 billion, including $9.066 billion for CMS and $14.608 billion for P&PS. Remaining performance obligations were approximately $13.8 billion, with approximately 45% expected to convert to revenue within twelve months.
- Shareholder returns: The company repurchased $285.8 million of common stock during the first nine months but suspended repurchases in March 2020 because of COVID-19. It paid quarterly dividends of $0.19 per share during the first three quarters of fiscal 2020.
Material Changes Versus the Prior Comparable Period
- Revenue grew 2.9% in Q3 and 7.5% year to date, supported by organic growth and contributions from the KeyW acquisition and the March 2020 acquisition of John Wood Group’s nuclear business, partly offset by COVID-19 effects.
- Operating profit more than doubled in Q3 and increased 68.0% year to date. SG&A declined 18.9% in Q3 and 6.5% year to date because of lower Transition Services Agreement costs, cost reductions and COVID-19 mitigation actions.
- Gross margins declined modestly because of project mix and lower overhead reimbursement rates, partially offset by favorable margins from acquired businesses and cost mitigation.
- Interest expense declined year to date following prior-year debt repayments, although debt increased during fiscal 2020 after the company raised approximately $1.04 billion through a new term loan facility.
- Miscellaneous income included a $131.4 million Q3 gain from changes in the fair value of the company’s Worley investment and related currency effects. Year-to-date miscellaneous expense included a $138.9 million loss on that investment, resulting in significant earnings volatility.
- Restructuring, transaction and other charges were $19.7 million in Q3 and $112.3 million year to date, compared with $93.2 million and $205.1 million, respectively, in the prior-year periods.
- The company completed the conveyance of all ECR assets and liabilities subject to the sale agreement; no ECR assets or liabilities remained classified as held for sale at June 26, 2020.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a clear quantitative full-year earnings or revenue outlook in the filing. It expected COVID-19 to continue adversely affecting both operating segments in the fourth fiscal quarter, although less severely than in Q3, with possible effects extending into fiscal 2021. The company reduced discretionary spending, halted non-essential hiring, furloughed certain employees and developed additional contingency plans.
- COVID-19 could reduce demand, delay or cancel projects, impair customer collections, disrupt suppliers and subcontractors, increase remote-work and cybersecurity risks, and create workforce and travel restrictions.
- Government assistance programs helped offset some labor and operating costs, but management did not expect to recover all related costs and fees. Program availability could change or end.
- The company held 51.4 million Worley shares valued at $312.3 million. Fair-value changes generated a substantial Q3 gain but a year-to-date loss and remain a source of non-operating volatility.
- Interest-rate swaps and a cross-currency swap covered $899.6 million of variable-rate debt, leaving approximately $757.3 million subject to variable-rate risk. A one-percentage-point increase in floating rates would have increased nine-month interest expense by approximately $10.4 million.
- Outstanding commitments included approximately $259.5 million of letters of credit and $2.1 billion of surety bonds. The company also disclosed significant guarantees and joint-venture obligations for which maximum future exposure could not be estimated.
- Material contingencies included the JKC Australia LNG arbitration, Kingston Power Plant-related litigation, government contract audits and investigations, and an SEC request concerning a formerly owned Moroccan joint venture and possible corrupt practices. Management stated that it did not expect these matters to have a material adverse effect beyond recorded reserves, but the JKC matter could be material if the consortium were found liable.
- Acquisition accounting for the John Wood Group nuclear business remained preliminary and could change as additional information became available.
Investor Verification Checklist
- Verify the sustainability of Q3 continuing-operations earnings excluding the $93.3 million after-tax benefit from Worley investment and related foreign-currency valuation changes.
- Reconcile reported net earnings and EPS with discontinued ECR operations and the prior-year ECR sale gain.
- Assess COVID-19 effects on backlog conversion, collections, project delays, workforce availability and government assistance.
- Review leverage, maturities, variable-rate exposure, covenant headroom and the company’s ability to refinance or repay debt.
- Monitor the valuation and potential future sale of the Worley share investment.
- Evaluate the JKC arbitration, Kingston litigation, SEC inquiry and other guarantees for changes in exposure or reserves.
- Confirm the final purchase-price allocation and integration costs for the John Wood Group nuclear acquisition.